Car showrooms are utterly devoid of customers and if somebody buys a new vehicle, it is almost regarded as a special event. Some showrooms do not even keep new cars on the premises and only order one if there is a customer for it. Even two years after the financial crisis there are precious few customers as many people have had their hands burned by purchasing cars. 

While a hundred and fifty-eight thousand cars found a buyer in 2008, and five out of ten of these were purchased under some form of financial construction (financial leasing or credit), this year barely fifty thousand were sold and four fifths of customers paid in cash.

People are not able to buy cars these days, explained one car salesman. The financial crisis and the weakening of the forint have led to a drastic increase - at least thirty to fifty percent - in installments paid on mortgages and on credits taken out on motor vehicles or hire purchase based on a foreign currency; thus, families have not been able to take out new loans.   

The domestic auto industry (at least as far as the number of new cars sold is concerned) has almost completely collapsed.  This year sales could shrink to a quarter of the number sold in 2003, a record year, says Péter Erdélyi, the chairman & CEO of the Hungarian Vehicle Importers Association (MGE).

However, what was happening before the economic crisis was hardly normal either.  Nowadays the distributors and financers (leasing companies and banks) recognise that they were primarily driving business and they encouraged many people to buy new cars who could not really afford to do so. The financers should have known that on the basis of the solvency and infrastructural state of the Hungarian market, a hundred and twenty to a hundred and fifty thousand new cars should have been purchased at the most and not 180-190 thousand, which was the average number sold between 2003 and 2008. These were the glory days when all a customer had to do was walk into a car showroom and present their ID after which they were able to buy a car worth several million forints on credit without paying a penny in downpayments.

After several years of frantic car purchasing on unlimited credit people now have three thousand more new cars than their actual buying power would justify, calculates Erdélyi. Such people would like to free themselves of their loans but are unable to do so.

It is no wonder that demand has fallen but another factor contributing to the present downward spiral is the dramatic tightening of credit regulations. Even during the heyday of easy credit some of the professionals warned the Hungarian Financial Supervisory Authority (PSZÁF) of the dangers inherent in unbridled foreign currency credit, although moves to counter this were only introduced some months ago.

Since spring this year the maximum maturity period has been reduced to seven years and in the case of credit taken out in forints, euros or any other hard currency at least twenty-five but even forty or fifty percent of the market value of the car must be paid in advance. (In the case of leasing this proportion is 20, 35 and 50 percent). Financers have also had to significantly tighten up checks on people's creditworthiness. The motivation has also decreased from the point of view of car dealers since they no longer receive ten to fifteen percent of the financed amount as a commission in one lump sum as it is instead proportionate to the realised payments and the maturity period, says Tamás Révész, the chief executive officer of the Budapest Auto Finance Company Ltd.    

According to the experts the recent situation is not good for anybody. Although in July more (4,393) cars were given a registration number than the year previously, the increase was primarily due to companies purchasing car fleets. Cars on the nation's roads are aging rapidly - the average vehicle is over 11 years old. The state is also losing out on the fall in car sales: according to estimates the treasury has received forty to forty-five billion forints less in registration tax and sixty to eighty billion less in VAT. 

The automotive profession believes that urgent government measures are necessary to safeguard the competitiveness and tax paying capacity of this industry and it has submitted a package of proposals to the decision makers. Included in the package are recommendations to modify EU clauses governing tenders - and chiefly the criteria for profitability and efficiency - in order to allow small and medium-sized car dealers to participate in tenders and so that they will be able to receive equal treatment to other companies in regard to tender opportunities.    

In Hungary the old car for new exchange programme applied in numerous EU countries is no longer regarded by the profession as justified although they believe government support would be a feasible idea in the case of exchanging cars with a high level of polluting emissions (such as two-stroke petrol cars) and to speed up the proliferation of green vehicles.   

The profession also urges an environmentally based reform of the numerous and high taxes related to purchasing and operating motor vehicles. In addition, there is a proposal to limit the upper band of registration tax to 1.2 million forints in order to discourage owners of vehicles with a high value from registering them abroad.

With a view to curbing tax evasion the practice of delayed VAT payment would also be amended and the VAT and other taxes related to purchasing motor vehicles would have to be paid at the same time as the registration tax. The profession also recommends that VAT should be refundable after the procurement of car fleets in the corporate sector, as well as for expenses incurred for repairs, running and maintenance, on condition that the cars satisfy certain green criteria. The package contains many other issues aimed at hyping up the industry since the automotive profession has serious concerns. The Hungarian market has now contracted so much that it has become insignificant for foreign car manufacturers. The importers and regional distributers might therefore move on, for example to Bratislava.   

While the market is stagnating, Hungarian car manufacturing - which is being driven by the German car industry - is beginning to pick up. Of course it is not the barely existent strength of domestic sales that is pulling the industry out of a ditch, since the car manufacturers who have established themselves in Hungary and their suppliers qualify for it as well as Slovakia, the Czech Republic and Poland as future markets; the models manufactured here are too expensive for domestic consumers.   

Hungarian Suzuki Ltd., which has now been in operation in Esztergom for almost two decades, should be a market leader but its market share of twenty percent four years ago has now waned close to six percent because the manufacturers who used to be known for their extremely cheap cars have in recent years come up with quality developments.

The first signs of an upswing in the car industry are not unambiguous either: some suppliers have recently thrown in the towel, while Dräxlmaier Hungária Ltd. in Mór is preparing to make four hundred and forty-five workers redundant. However, many people have been excited by the news that Audi Hungaria Motor Ltd. in Győr, which employs six thousand people and accounts for nine percent of Hungarian exports, has expanded its plant from 174 hectares to 369. 

According to the German magazine, Automobilwoche, the Audi plant in Győr - which has proven itself to be more competitive than the one in the United States - is expanding its vehicle production, developing its car-body manufacturing and establishing a lacquering plant, and recruiting new experts for all of this.   

The city of Győr is situated in a favorable location near the triple Hungarian-Slovak-Austrian border and it has a trained workforce at its disposal. And last but not least a Hungarian worker on the production line earns a fifth (a monthly salary of two hundred thousand forints gross) as much as his German counterpart. The supplier Bosch has recently announced that it will be creating one thousand new jobs.   

Mercedes has invested 800 million euros in Kecskemét with plans to manufacture one hundred thousand at the outset and employ three thousand people in its new factory set to start production from the end of 2011, which will potentially provide work for thousands of local suppliers. This is good news since the proportion of Hungarian supplies is small both in Audi and Suzuki.    

However, nobody can afford to rest on their laurels: although it is not anticipated that foreign owners will move their production to the Far East because of the disadvantages caused by logistic costs and distance, the on-going competition for investment is becoming increasingly harsher in the CEE region.
 

The car industry in figures

The annual turnover of the Hungarian automotive market is one thousand billion forints (four percent of GDP) and provides work for fifty thousand people. This year four to five thousand new cars are being sold per month, while eighteen to twenty thousand used cars are being purchased every month. In private sales two to five million forint small and low intermediate cars sell the best with Fords being the most popular. Vehicle financing dropped by sixty-seven percent annually. Financers lose an average of one million forints on repossessed cars.
 

The Hungarian and Slovakian car industries

Hungary - The income received by car manufacturers and supplier companies is 3,500 billion forints, which amounts to over ten percent of the GDP, and they employ over sixty thousand people. This amounts to more than a quarter of Hungary's exports from the processing industry. Hungary is a market leader in the region in engine manufacturing: Audi manufactures 1.9 million, while General Motors in Szentgotthárd manufactures four hundred and fifty thousand.

Slovakia - This year Volkswagen in Bratislava, Kia in Zsolna and PSA in Nagyszombat will manufacture 535 thousand cars and next year they plan to manufacture six hundred and seventy thousand. The number of cars manufactured last year dropped by twenty percent, to four hundred and sixty-three thousand, because of the crisis. The car industry, which amounts to a quarter of Slovakian exports, together with suppliers provided work for some eighty thousand people last year. Their products are mainly sold on the Asian and American markets.